Banking and Financing

August 15, 2002 - On June 12, 2002, a group of banking and finance CEOs gathered at the Four Seasons Hotel in Las Vegas for a roundtable discussion of challenges and issues affecting their industry in Nevada. The roundtable was a part of Nevada Business Journal’s monthly Industry Outlook series. Those in attendance represented large and small banks, credit unions, financial advisors and investment firms from both ends of the state.

The meeting was moderated by Lyndon Evans, deputy commissioner of the Financial Institutions Division of the State of Nevada. The group engaged in a discussion of such subjects as: technological changes in the industry, customer service, interest rates and national economic trends. They also discussed topics affecting Nevada’s economic development, including the state’s tax base, the medical malpractice crisis and funding for workforce education.

Technology & Customer Service

Lyndon Evans: How has technology affected our industry and how will it affect us in the future?

John Gaynor: Over the last three decades, technology has grown tremendously, and [banks] have to keep up. Customers demand it. The wealth of this country has been domiciled in people 55 years and older and those people may or may not be proficient on the computer, but at some point in time the baton will be passed to the next generation, and that generation has been brought up on Nintendo and computers. Although people used to like to go in and shake hands with their banker, I’ve talked with some people who are 18 to 20 years old and they don’t even know who their banker is. Everything’s done electronically on the Internet. They get CD rates there, they use it to pay their bills. They don’t need that comfort level with their banker anymore. I hope that doesn’t change before I retire, but we’re seeing that more and more.

Connie Brennan (Nevada Business Journal): Are customers resistant to new technology, or are they the ones driving it?

Bill Martin: Bankers for years have tried to force technology on customers, with the idea that they wanted it. ATMs are probably the most famous example. We thought customers wanted them, so we invested vast fortunes in ATMs, but it took many, many years before they were ­accepted. This relates to one of our other agenda topics, which is customer service. If you went around the table and asked people to define what they mean by customer service, the smaller banks would probably say, “personal touch”, but if you go to customers, they will probably say, “convenience”. Technology has brought so much convenience to people that they will say, “That’s great service.”

Mark Daigle: Banking is still a people business. An answering machine or voicemail can’t solve your problem for you. People want the extended hours and other things that technology provides, but they still are going to insist on talking to a person when it’s time to fix a problem or get help with something. They don’t want to be put in a box that says, “Your account doesn’t allow you to talk to somebody. You have to go to an ATM or use online banking or we charge you a fee.” That’s not what customer service is. It’s not customer service if you have to pay for it. The pitfall with technology is that if you use it purely for cost containment, there’s no way to avoid eventually hindering customer service.

Mike Shustek: I’m talking from the other side of the table because I’m not a banker. What makes us feel good, is when we get called from US Bank every once in a while asking, “Is there anything else we can do for you?” The impact of just a simple phone call is unbelievable, because my staff will tell them what they can do or what they can’t do. We get this sometimes from the other banks we deal with, too.

Edward Jamison: Banks have historically been managers of risk. Technology has brought about a new form of risk that we’re not yet accustomed to. With Internet fraud and other things that are associated with technology, there come issues we’ve never had to address before. Technology has been a real boon to banks in the delivery of products and services, but it also has another element to it, and I don’t think we’ve all recognized the depths of the problems that can occur through all those conveniences. How do you protect yourself from the risk that’s out there? We all have benefited from technology, but we also have an added risk.

John Guedry: I think the biggest challenge is that [technology] is changing so rapidly. Trying to stay up with that change is a pretty large investment for a small company like ours. To make that investment and understand that six months from now what you’re investing in could change dramatically, you have to be thinking a couple steps ahead. I don’t know that technology has saved our industry dollars. Savings are not dropping to the bottom line. I do agree it’s provided more convenience to our clients and made our employees more efficient, but there’s a cost associated with that.

Jackie DeLaney: [Technology] is providing a benefit, but it’s not really saving our bottom line in terms of employees. We have not seen a need to reduce our staffing as a result of technology. In fact, we have had to increase our staffing because of the management of that technology – security management and other issues. It’s really more of a customer service convenience.

Brennan: Do you think at some point it will catch up and you’ll be able to ­reduce staff?

DeLaney: I think there will be some evolution that way, especially for the large banks that have high-volume services. They will see some efficiencies. I think 25-year-olds may be more accustomed to doing their banking on-line and not going into a branch. But on the other hand they probably don’t own a business, either. Business customers are always going to need that one-on-one.

Dennis Guldin: We have customers who want to have all the technology systems. But as a community bank, we also have customers who want to fax items in, who want to call in on the phone when they want something personally done. We do see a migration of those customers moving to technology over time and learning from bank personnel. So, it is a product line that banking is going to have from now on. We just have to educate the customer to use it.

Shustek: I really have the best of both worlds. I don’t think I have a client under 50, and I don’t have many employees over 50. My employees, who are very young, are very technology-oriented. Some day we’ll have to move to a more technology-oriented system as this group gets older. We just did a survey to see how many people hit our Web site each week. We post on the last business day what interest rate our clients are going to earn. Seniors might not be technology-oriented – they don’t want to talk to a computer, or punch in their mother’s maiden name. But when it comes to their money and what they’re going to earn – between 5 p.m. and 8 p.m. on the last business day, we get over 4,100 hits, and that’s with about 6,000 clients. So even seniors are getting there.

Joseph McLaughin: Our side of the financial services industry went through an entire revolution driven by customer desire and need. We were forced to catch up as an organization because of the demand from customers to be able to do certain services online – in particular, trading. Merrill Lynch Online and Merrill Lynch Direct are two services that were born of customers directly telling us that in order to continue doing all their business with us they simply needed these products and services. It was definitely driven by customer demand.

Daigle: The enactment of the Gramm-Leach-Bliley Act has given us a lot of new powers and authorities, and we are all still trying to figure out what new products and services we are now able to bring to the table, whether it be more traditional investment products such as annuities, or insurance products. There are lots of opportunities out there for us to be more of a one-stop shop for customers’ financial needs, going beyond their mortgage and their checking account to their brokerage and their investment account, their insurance needs, estate planning and those kinds of things. Banks are able to spread their wings into some new areas that are tangential to the financial products and services industry at a time when everyone else has been able to nip away at what banks provide. It remains to be seen how we take advantage of that.

Jamison: [As a small bank,] we can gather all of our people together to talk about customer service, whereas in some other institutions with massive size, it is harder. I remember when I first got into the business years ago. The president of the institution I worked for said every customer walking through the door was a $100 bill. Now it’s a $1,000 bill. We have to understand how important customers are and how hard they are to come by and to keep.

Alan Pughes: Every customer has different needs and what we try to do is segment our market to identify what the needs of the different segments are. We do surveys constantly and ask members what is most important to them. The most difficult part is training our staff to recognize that they have to do things differently for different segments, because people perceive good customer service differently. Some people perceive it as making that phone call, some people perceive it as simply being available, and other segments don’t want to talk to people – they simply want the electronics. We have to identify what the members perceive as customer service and then deliver it to them the way they want it. It’s not an easy challenge.

Evans: Do smaller banks see that they need to expand the services they offer in order to compete?

DeLaney: Statistical data shows the more services a customer uses [at a financial institution], the more likely the institution is to... Continue >>

retain that customer. Years ago, it was three or four services, but the information I am reading today says it is seven or eight. You’ve got to have that variety of products and services to offer them, like insurance and other products. I think the customer is migrating more to the one-stop shop type of program, where they can take care of almost everything in one location.

Ladd: All of us need to offer the services and the products our customers want. But there is another point to consider, and that is the fact that the spread business is terrible. We can’t be profitable enough to satisfy our shareholders and to satisfy the regulators from capital if we are strictly trying to make it on spreads – on the deposit spread or the loan spread. So, we need to be able to offer the products and services our customers want and also the things we can make a decent margin on. The spread business is a tough business, and if we are trying to make it just on spread, we are not going to make it.

Jamison: For all of us the spread is thinning, as we have seen over the past year, and it is the non-interest income sources we are trying to enhance and bring up. We are all chasing the same loans. It is very competitive, and we have to look for ways to enhance our bottom lines by looking at non-interest income. The Gramm-Leach-Bliley Act allowed for some flexibility in what banks could do. Already [the government] allows us to do insurance, and we are instituting the law to allow brokerage of real estate transactions, but now the real estate industry is up in arms and lobbying against that. We are always looking for ways to enhance our profitability. Banks are not just banks anymore – they are full service financial institutions.

Evans: How has the slowdown over the last year or so and the events of Sept. 11 impacted the local economy? How is that affecting your bank or your institution?

Brian Gordon: As we move further away from Sept. 11, visitor volumes seem to be picking up, but travelers flying in are still down about 8 percent year-over-year. That is offset a bit by visitors who are driving into town. There are two major indications of where things are going. We look at equity valuation of publicly traded gaming operators, and we are seeing all-time highs in some instances. The other indicator is what sort of development and capital expenditure projects we see on the horizon, and there are several new expansions in the works. So, you’ve got an investing public that is looking positively at the local economy and we are seeing the operators also looking to have a second building boom here. All in all, the outlook seems positive.

Robb Smith: Sept. 11 and the general economic malaise have really accelerated the immigration from Silicon Valley. That is a very important factor in Northern Nevada. When we started to look at technology growth in that area four or five years ago, I made the observation that as long as people have inflated stock option packages and are making great incomes and the stock market’s going crazy, it is going to be very difficult to draw people out. Now, with the downturn and the deflation of the equity markets, there has been a massive immigration, so I think the North has benefited a lot from what has happened in Silicon Valley.

Gaynor: I think the banks are already looking at their crystal balls and saying rates are probably more pressured to go up than they are to go any further down. I think that short term is the way to go – that is a personal feeling, not my bank’s position.

Ted Schlazer: Normally you have two factors that control interest rates – the basic economics of the market and inflation. We are in an interesting time now because we are going through a period where there are other factors overriding these fundamentals. Two more important fundamentals are ruling the market right now – fear and greed. If you don’t believe that, take a look back at the stock market in ’98 and ’99 when ebay ended up with a market capitalization greater than General Motors. That is greed. If you want to look at fear, just go back to the bond market in February and March. Emotions are overriding the markets right now. You want to make a rational decision, but the problem is, you can’t evaluate emotions. Interest rates right now in the short term are going to rubber band. They are just winding up – it is just going to be getting ready for that big pop. The point is, as soon as this thing turns and there is some kind of light at the end of the tunnel, you are going to see these things just spike up like crazy. You are going to have periods of extreme volatility. The problem is just trying to predict when that is going to happen. The challenge is making a decision. You can’t just sit and do nothing. You can’t just sit on cash waiting for rates to go up – you have to have some kind of happy medium where you can get a rate of return but still maintain that equity and minimize the risks.

Ladd: I need to put on my NDA hat for a moment. In the state of Nevada we’ve all been very prosperous. Many of us around this table have enjoyed the prosperity of this community for a very long time, and I’d like to suggest to this group that we are at a crossroads. We have some very important challenges to face in the coming couple of years. In the last two months [NDA] has had site visits from 53 companies potentially coming to Southern Nevada. Of those 53 businesses, three of them asked us about Yucca Mountain, but 48 of them asked about the malpractice insurance issue. Thirty-six of them asked about the issue of new taxes. There is a revenue problem in the state of Nevada and it will not rest solely on the shoulders of the gamers, because they won’t accept that. But if as business people we don’t continue to strive to be a low-tax environment, you can shut the spigot off, because we have so few incentives as a state to offer compared to our competition. We have very few incentives to offer businesses to relocate here, but the tax environment is one of them. We are going to face that issue in this coming Legislature. We’ve got an education issue. We get asked consistently about our education environment. It’s not just K-12, although K-12 is a huge problem. We’ve got a university problem in both ends of the state that is critical. I applaud the governor for the Millennium Scholarship, which has increased the student population at UNR and UNLV in double digits. Yet, their budgets have remained flat. How are you going to supply quality education as student enrollment increases if budgets remain flat? Where is that money going to come from? I think that issue is very serious. As bankers, whether we continue to prosper or not will depend on whether these issues are thought of in the long term and not just in the short term.

Smith: For so long the state has been focused on taking the pie and splitting it into smaller and smaller pieces, but we are not focused on growing the overall pie. We have a fundamental macroeconomic problem in this state. As a venture capitalist firm, we won’t make an investment unless we can see a company becoming worth $100 million within 60 months from the date of investment. Alere Medical, a high-growth company in Northern Nevada, pays its employees an average of $65,000 a year. Our message is that we can grow high-wealth-creating companies in Nevada very quickly and this is the perfect environment in which to do it. That grows the overall pie. You’re not going to do it by putting more properties on Las Vegas Blvd. with 7,000 employees making $12 an hour. We can’t continue to grow the state that way. There has to be a fundamental shift, not only in fiscal policy in terms of taxation, but also a shift in mentality of how you create wealth in the 21st century. It comes from intellectual property, it comes from education. I think we in Nevada are at a very important crossroads. We could be like a third world country in 50 years in the middle of the western U.S. if we are not careful, because we are focused on the wrong things – in my humble opinion.

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